Do Inherited IRAs Get a Step-Up in Basis? Tax Rules and RMDs

Inherited IRAs do not get a step-up in basis. Federal tax law specifically excludes retirement accounts from the step-up rule that applies to most other inherited property, because the money inside an IRA is treated as income the original owner never paid tax on. Every dollar you withdraw from an inherited traditional IRA is taxed at your ordinary income rate, which reaches 37% in 2026 for single filers with taxable income above $640,600.¹ Inherited Roth IRAs also miss the step-up, but the practical hit is much smaller because qualified Roth distributions are already tax-free.

Why the Step-Up Rule Doesn’t Reach IRAs

For most inherited assets, the cost basis resets to fair market value on the date the owner died. Buy stock for $10,000, die with it worth $100,000, and your heir can sell for $100,000 the next day and owe no capital gains tax. The $90,000 of appreciation is never taxed.²

IRAs are carved out by a single sentence. Section 1014(c) says the step-up does not apply to property that constitutes “a right to receive an item of income in respect of a decedent” under Section 691.² An inherited IRA is exactly that. The money went in pre-tax, grew tax-deferred, and the tax bill was always waiting. Death doesn’t erase it. It shifts it to whoever inherits the account.

The concept has a name: income in respect of a decedent, or IRD. Section 691 requires whoever receives that income to include it in gross income for the year they receive it, and the income keeps the same character it would have had in the decedent’s hands.³ For a traditional IRA, that character is ordinary income.

How an Inherited Traditional IRA Is Taxed

Because there is no basis reset, the entire balance of a typical inherited traditional IRA is taxable as you withdraw it.⁴ The original owner deducted the contributions going in, so the account’s basis was zero. You pay ordinary income tax on every dollar that comes out.

How much that costs depends on your other income. In 2026, federal rates for single filers run from 10% on the first $12,400 of taxable income up to 37% above $640,600. Married couples filing jointly hit the top bracket at $768,700.¹ A single large withdrawal can push you into a higher bracket for the year, which is the main reason people spread inherited IRA distributions across multiple tax years.

The Partial Exception: After-Tax Contributions

Some IRA owners made contributions they could not deduct, usually because their income exceeded the deduction threshold or they were covered by a workplace plan. Those after-tax dollars represent the decedent’s basis in the account, and that portion of the account passes to you tax-free. Only the earnings on those contributions are taxable.

Tracking this is your job. You report it on Form 8606 for any year you take a distribution from an inherited traditional IRA that contains after-tax money.⁵ The form calculates the ratio of after-tax contributions to the total account balance, and that ratio determines how much of each distribution is excluded from income. Skip the form and you risk paying tax on money that should have been tax-free. The decedent should have been filing Form 8606 during their lifetime, and their prior returns are your starting point.

How an Inherited Roth IRA Is Taxed

Inherited Roth IRAs also get no step-up, but the point rarely matters. The original owner already paid income tax on Roth contributions, so withdrawals of contributed amounts are always tax-free to you as the beneficiary.

Earnings are tax-free too, as long as the distribution qualifies. The key condition is that the original owner’s Roth must have been open for at least five tax years, measured from January 1 of the year the owner made their first Roth contribution.⁶ The clock runs from the decedent’s first contribution, not from the day you inherit. If your parent opened a Roth in 2018 and died in 2026, the five-year requirement was already met, and everything you take out is tax-free.

If the Roth was less than five years old at the owner’s death, withdrawals of contributed dollars are still tax-free, but earnings are taxable until the five-year clock runs out. Most inherited Roth accounts clear the threshold easily because the owner typically held them for years.

When You Have to Take the Money Out

Because there’s no step-up, the timing of your withdrawals is where the real tax planning happens. Most non-spouse beneficiaries who inherited an IRA after 2019 must empty the entire account by the end of the tenth calendar year following the owner’s death.⁷ Within that window, you can take as much or as little as you want in any given year.

There is one wrinkle. If the original owner died on or after their required beginning date (currently age 73 for those born between 1951 and 1959), you also have to take annual required minimum distributions in years one through nine, with the remaining balance out by year ten.⁶ If the owner died before that date, no annual minimums are required during the 10-year window, though waiting until year ten to take everything at once concentrates the entire tax bill into one return.

A few categories of beneficiary are exempt from the 10-year rule and can stretch distributions over their own life expectancy: a surviving spouse, a minor child of the account owner (until age 21), a disabled or chronically ill person, or someone not more than 10 years younger than the decedent.⁷ Surviving spouses have additional options, including rolling the inherited IRA into their own, that non-spouse beneficiaries do not.

The IRD Deduction for Large Estates

If the estate you inherited from was large enough to owe federal estate tax, part of the sting on the income tax side can be offset. Section 691(c) allows a deduction on your income tax return for the portion of estate tax attributable to the IRA.³ Without it, the same account would effectively be taxed twice, once inside the estate and again as income to you.

The deduction is a miscellaneous itemized deduction that is not subject to the usual floors or phase-outs. You calculate the estate tax actually paid, then recompute what would have been owed if the IRD items were excluded; the difference is deductible, spread proportionally among the beneficiaries who receive IRD.

In practice, this matters only for very large estates. The federal estate tax exemption for 2026 is $15 million per individual, or $30 million for a married couple, so estates below that threshold owe no estate tax and generate no IRD deduction. For estates that do cross the line, the deduction is easy to miss and often significant.

Don’t Forget State Income Tax

Federal tax is only part of what you’ll owe. Most states tax inherited IRA distributions as ordinary income at their regular rates, which range from around 2% to over 13% depending on the state. Roughly a dozen states impose no income tax at all, and some that do offer partial exemptions for retirement income, often only for taxpayers above a certain age. For a high earner in a high-tax state, the combined federal and state rate on an inherited IRA distribution can climb well above 40%.

Because there’s no basis step-up to soften any of this, when you take the money out within the 10-year window is often the biggest lever you have. A distribution taken in a year when your other income is low, or an even split across all ten years, can produce a materially smaller total tax bill than emptying the account in one shot.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
3
Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
4
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
5
Internal Revenue Service. Instructions for Form 8606
6
Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements
7
Internal Revenue Service. Retirement Topics – Beneficiary